Municipal Bonds Types and Characteristics

Matthew Conde

“Galloping Gertie” Built and Collapsed in 1940

Second Bridge Built in1950 (so far, so good)

Tacoma Narrows Bridge

2007 – Another Bridge Added

Bond Proceeds - $800 million Motor Vehicle Fund - $39 million Investment Income - $10 million

Source: Tacoma Narrows Bridge Project Financial Plan Version 1.0, page 9, WSDOT, July 2002.

Common Bond-Backed Projects:

Financing Infrastructure

Road Improvement Education

Additional Examples

Public Utilities

Publicly-Owned Airports

Mass Transit

“For the Public Good” criteria Determination Subject to IRS Review

Taxable or Non-Taxable?

Sports Arenas are an example of a taxed Municipal Bond

Repayment based on ability to tax Considered the safest type of Municipal Bond

General Obligation Munis

Low Income Housing

Repayment based on revenues from project Not as safe due to potential volatility of revenues

Revenue Munis

Oil Drilling

Enacted to Reduce Municipal Borrowing Costs

Direct Payment BABs: 35% subsidy of interest paid by the issuer

Tax Credit BABs: Provides participating bondholders with tax credit

Build America Bonds

Current Yields

From wellsfargoadvantagefunds.com 2011 outlook

Tax exempt (Single, Double, Triple) Capital Gains are subject to tax

Tax Advantages

Your federal income tax bracketIs a municipal bond fund

appropriate?

15% Unlikely

25% Likely

28% Very likely

33% Highly likely

35% Highly likely

From personal.fidelity.com

There are limits to bond-related taxation Municipal bonds may carry social

implications

More About Taxes

Vs.

“Providing tax exemptions to residents of issuing municipalities creates economic harm”

How would you support or refute this claim?

Discussion Question

1988: Muni tax exemptions not protected 2008 – Department of Revenue of Kentucky

v. Davis : “Tax structure is one of the tools of competition”

The Supreme Court Weighs In

Understanding Bond Risks

Bond related debt continues to grow….

A Muni Bubble???

Liquidity Risk

Funding Liquidity – Issuer will be unable to meet liabilities when they come due, or will only meet in unfavorable economic circumstances

Asset Liquidity – Asset cannot be sold due to lack of market liquidity

Municipal Bonds finance infrastructure Investors are attracted to tax exemptions;

thus they have (relatively) lower return requirements

G.O. Munis are backed by tax revenues, Revenue Munis by project revenues

Even safe investment vehicles have social implications and risks attached

If You Remember Anything…